Asia’s Gas Blowout?

Asia’s gas boom could evaporate as early as 2017, hit by a wave of new projects and the continued revival of Japan’s nuclear power sector. The warning came at an industry conference in Brisbane, Australia, even as the nation eyes its potential emergence as the world’s biggest gas exporter by 2018, following A$200 billion ($170 billion) worth of investments in oil and gas projects.

“New suppliers of liquefied natural gas (LNG) are entering the market, especially the U.S. We see potential supply exceeding demand, especially after 2017/18, and only those projects that provide LNG at a competitive price will be able to secure demand and actually materialize,” Shinichi Kihara of Japan’s Ministry of Energy, Trade and Industry (METI) told the Australian Gas Export Outlook 2014 conference on June 24.

Kihara’s statement followed recent forecasts by the International Energy Agency (IEA) of the continuation of the “golden age” of gas, with a projected “near-doubling” of Chinese demand through to 2019 expected to compensate for a slowdown elsewhere.

The IEA cut its forecast for gas demand growth from 2.4 percent to 2.2 percent a year over the next five years, with high LNG prices “threatening to crimp demand” even while Australia and North America ramp up production.

Kihara said Japan was committed to reviving domestic energy production, including nuclear, under its new strategic energy policy launched in April.

“We used to have 30 per cent of our power from nuclear, and today it’s zero,” he said, noting that the lost power had been replaced largely by imports of gas, oil and coal. LNG imports surged by 24 percent post-2011, but demand had since flattened out, he said, with Tokyo working to reduce the nation’s import dependency.

“The principle for our energy strategy is diversification…we will use all energy sources, including nuclear, renewables, coal and gas,” he said, despite its lack of specific targets.

According to Kihara, all 48 of the nation’s nuclear power plants were shut down for safety checks following the March 2011 disasters, however the Nuclear Regulation Authority is currently working to restart at least one plant in Sendai later in 2014 among the 18 targeted for reopening.

“The new nuclear safety authority is working on the front-runner in Sendai…But even after the authority gives the green light, the utility company has to negotiate an arrangement with the local government,” he said, adding, “I hope the first restart will happen some time later this year.”

Kihara’s optimism may have been tempered by a Reutersreport Monday citing resident concerns over an evacuation plan for Ichikikushikino, a town located three miles from Kyushu Electric Power’s Sendai plant. According to the report, more than half the town’s 30,000 residents have signed a petition opposing its restart.

Sendai reportedly aims to have approval for two nuclear plant restarts by September, helped by local political backing, but the power companies face a battle winning over nervous communities in the wake of the ongoing Fukushima nuclear disaster.

Nevertheless, Kihara said the planned nuclear restart would add to Japan’s reduced demand for gas, with other sources such as coal-fired power, domestic resource development and increasing energy efficiency also curbing demand, he said.

Kihara said Japan had made major investments in North American LNG plants, with the aim of reducing imported prices that currently were more than four times the U.S. Henry Hub price. He said Japanese companies had invested in U.S. projects that would provide 20 per cent of Japanese total gas demand, with first gas deliveries expected in 2017, at a price around 20 to 30 per cent lower than current prices.

Global Buildup

Shigeki Hirano, chairman of Osaka Gas Australia, pointed to a massive buildup in global LNG capacity, with 17 projects, including seven in Australia, either under construction or on the verge of groundbreaking.

“Within a few years, these projects will come onstream, adding new production capacity of 132 mtpa [million tons per annum]. Furthermore, a massive amount of capacity is being promoted for final investment decision in many parts of the world, including in North America, Africa and Russia,” he said, estimating global capacity exceeding 500 mtpa by 2030.

Meanwhile, the demand outlook for Asia was uncertain, with emerging economies such as India “extremely price sensitive,” while the nuclear industry faced domestic pressures in Japan as well as Taiwan and South Korea. China’s recent supply deal with Russia was reportedly below the average imported price into China and constraining future growth opportunities.

On June 25, Australia’s Bureau of Resources and Energy Economics (BREE) released its quarterly resources and energy update in which it warned of further weakness ahead in prices, despite the massive ramp up in production which would see the value of the nation’s mineral and energy exports top A$201 billion in fiscal 2015.

“The outlook for resources and energy investment therefore remains subdued in the near term with the investment cycle having peaked. The value of committed resources and energy projects has now decreased from its peak of A$268 billion in April 2013 to A$229 billion at the end of April 2014,” the report by the Australian government researcher said.

Speaking at the Brisbane conference, BREE’s deputy executive director Wayne Calder said the nation’s exports of LNG would “dwarf” domestic consumption, with the industry’s “world firsts” including this year’s first production of LNG in Queensland, supplied by coal seam gas (or coal bed methane).

Calder said the nation currently had about 24 mtpa of LNG capacity, through offshore Western Australia and northern Australia, but with an additional 62 mtpa under construction as well as a further 35 mtpa “under consideration.”

BREE expected “strong LNG growth over the next five years” with Asia comprising around 70 per cent of the demand growth, including traditional markets of Japan and South Korea but also new markets in China, Southeast Asia and also India.

However, he noted increasing supply and competition from US shale gas as well as Russian pipeline exports would cause prices to ease from around 2017/18, with additional supply potentially from new Russian projects as well as via Africa.

“Australia is a long-term and stable supplier, but it is regarded as a reasonably high-cost supplier as well. McKinsey & Co in 2013 found current Australian projects are 20 to 30 per cent more expensive than competing countries, so that’s a very large differential to be giving away to new developments,” he said.

However, Clyde Russell, Asia commodities and energy columnist for Thomson Reuters, cast doubt on the projected gas export wave from North America. According to Russell, the current projected new plants “will not be built under current economic scenarios,” particularly given domestic political opposition to the export of cheaper gas to manufacturing competitors such as China.

“Australia is still in the race to meet future LNG demand…but project costs will have to come down, and lower prices will be the new normal,” he said.

Gas boom or bust? Asia’s major gas buyers will be hoping that the industry’s “golden age” is not quite as golden for sellers, even while Australia and other exporters seek to maintain prices in the battle over customers.